Diageo India loss rises as demand for vodka falls, spending rises

Diageo gets most of its business in India from Smirnoff vodka and Vat 69 scotch whisky. Photo: Hemant Mishra/Mint

Bangalore:Diageo India Pvt. Ltd reported a loss of Rs.43.4 crore for the nine months to 31 March, wider than its loss of Rs.12.6 crore for all of 2011-12, as weak demand for vodka and higher spending to promote its newest whiskey brand, Rowson’s Reserve, weighed on earnings.

Diageo India, an unlisted company owned by the world’s largest distiller Diageo Plc, changed its financial year to April-March from July-June.

Total revenue for the nine months ended March was Rs.497 crore, according to documents available with the ministry of corporate affairs. Revenue in the previous financial year was Rs.580.2 crore. The company gets most of its business in India from Smirnoff vodka and Vat 69 scotch whisky.

Diageo has been present in India since the early 1990s, but has been a fringe player, lagging local companies such as United Spirits Ltd as well as global rival Pernod Ricard. United Spirits reported sales of over Rs.8,700 crore and Pernod Ricard’s sales stood at over Rs.7,200 crore last year. To gain a stronger foothold in the market, Diageo bought a 25.02% stake in United Spirits in July, gaining management control at India’s largest distiller.

India’s liquor companies have seen growth slide for three years in a row because of increasing prices and slowing economic expansion.

Last year, rising prices and regulatory changes in key states resulted in a surprise drop in the demand for vodka, once the fastest growing liquor in India, with drinkers moving to cheaper alcohol such as brandy. Smirnoff, too, reported a 6% decline in sales volume last year.

Sales volumes of Diageo’s Vat 69 label, however, increased by over 10% last year as the company increased distribution and gained market share from Beam Inc.’s Teacher’s, once the highest selling scotch whisky in India. Beam’s India unit temporarily stopped making products last year after the company suspended its senior management and began an investigation of the unit’s financial dealings.

A Diageo India spokesperson said the wider loss in the nine months to March reflected the company’s heavy spending on marketing its Rowson’s Reserve whiskey brand, launched two years ago.

“Their focus on scotches and luxury (Johnnie Walker scotch whisky) is very strong and I think because of that Smirnoff seems to have been a bit lost,” said Santosh Kanekar, a former marketing head at Diageo’s Indian unit, who now advises funds on investing in India. “I think the deal with United Spirits would’ve been a distraction, too, because Diageo has strong brands, but the management may have been distracted about what’s going to happen to their futures.”

This year, too, Diageo’s sales performance has followed last year’s pattern, with volumes of Smirnoff vodka declining 4-6% in the first six months, while Vat 69 reported a volume growth of over 30%, again grabbing market share from Teacher’s.

Analysts expect Diageo India to get a boost from the wide distribution reach of United Spirits.

United Spirits said in September that it would distribute Diageo’s brands in India for a distribution fee of 6% of sales. The company expects to sell Rs.500 crore worth of Diageo products this fiscal year.

“The real test will be now when USL is selling their brands. USL has a strong distribution network, so we’ll get to know whether the integration has worked out for Diageo India with their performance this year onward,” Kanekar said.